Question

JBL Aircraft manufactures and distributes aircraft parts and supplies. Employees are offered a varlety of share- based compensation plans. Under its nonqualified stock option plan, JBL granted options to key officers on January 1, 2018. The options permit holders to acquire 9 million of the company's $1 par common shares for $38 within the next six years, but not before January 1, 2021 (the vesting date). The market price of the shares on the date of grant is $42 per share. The fair value of the 9 million options, estimated by an appropriate option pricing model, is $6 per option. Because the plan does not qualify as an incentive plan, JBL will receive a tax deduction upon exercise of the options equal to the excess of the market price at exercise over the exercise price. The tax rate is 40%. Required: 1. Determine the total compensation cost pertaining to the incentive stock option plan. 2.&3.Record the necessary journal entries on December 31, 2018, 2019, and 2020. Assume all of the options are exercised on August 21, 2022, when the market price is $43 per share. ces Complete this question by entering your answers in the tabs below. Req 1 Req 2 and 3 Record the necessary journal entries on December 31, 2018, 2019, and 2020. Assume all of the options are exercised on August 21, 2022, when the market price is $43 per share. (If no entry is required for a transaction/event, select "No jou entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 shou 1 ntered as 5. 5)

Answer 1

Requirement 1

At January 1, 2018, the total compensation is measured as:

     $ 6                   fair value per option

x       9 million       options granted

= $54 million       fair value of award

Requirement 2

Dec. 31, 2018, 2019, 2020

                                                                                        ($ in millions)

Compensation expense ($54 million ÷ 3 years)..    18.0    
    Paid-in capital – stock options..................            18.0

Deferred tax asset ($18 million x 40%)..............      7.2    
    Tax expense ............................................              7.2

Note: Since the plan does not qualify as an incentive plan, JBL will deduct the difference between the exercise price and the market price at the exercise date. Same entry will repeat for year 2019 and 2020.

Requirement 3

August 21, 2022

                                                                                                                      ($ in millions)

     Cash ($38 exercise price x 9 million shares).................................     342.0

     Paid-in capital - stock options (account balance)....................       54.0
         Common stock (9 million shares at $1 par per share)...............                  9.0
         Paid-in capital – excess of par (to balance)..............................                  387.0

     Income taxes payable ([$43 - 38] x 9 million shares x 40%).........       18.0
     Paid-in capital - tax effect of stock options (remainder).........         3.6
         Deferred tax asset (3 years x $7.2 million)............................                21.6